For first-time investors in Utah, financing your first investment property correctly is essential to maximizing cash flow and minimizing monthly expenses. With a 20-25% down payment, you have access to a variety of financing options that provide favorable terms, better interest rates, and the potential to scale your portfolio more effectively. Here’s a guide to the best loan options available for Utah investors who are prepared to put down 20-25%, along with tips on how to select the financing that best aligns with your investment goals.
Why a 20-25% Down Payment is Advantageous
- Lower Monthly Payments: A larger down payment reduces the loan principal, resulting in lower monthly mortgage payments, which helps increase cash flow.
- Avoiding Private Mortgage Insurance (PMI): Lenders typically waive PMI for borrowers who put down at least 20%. This saves you hundreds of dollars a month, directly improving profit margins.
- Improved Interest Rates: With 20-25% down, lenders view you as a lower-risk borrower, often resulting in more competitive interest rates. Even a small difference in rate can save thousands over the life of a loan, making the investment more profitable.
- Faster Equity Growth: Starting with 20-25% equity helps you build wealth faster, providing a financial cushion and allowing for refinancing options or accessing equity for future investments.
Top Loan Options for Utah Investment Properties
For investors with a 20-25% down payment, the following loan options offer competitive terms and benefits tailored to real estate investment.
1. Conventional Investment Property Loans
- Overview: Conventional loans are the most popular financing choice for investment properties. With 20-25% down, you’ll avoid PMI, secure a competitive interest rate, and benefit from long-term fixed-rate terms.
- Benefits: Conventional loans allow investors to scale portfolios easily, as they don’t require owner-occupancy. They offer flexible terms, from 15- to 30-year options, which can be tailored based on cash flow needs and long-term goals.
- Ideal for: Investors who want long-term rental properties and prefer fixed monthly payments for predictable cash flow.
- Example: Jane, a first-time investor in Salt Lake City, used a conventional loan with 25% down to purchase a single-family rental. With no PMI and a fixed 30-year term, she secured steady monthly payments, maximizing her cash flow and making her rental more profitable.
2. Portfolio Loans from Local Utah Credit Unions
- Overview: Portfolio loans are offered by smaller banks and credit unions, and the loan is kept within the lender’s portfolio rather than being sold to investors. This allows for more flexible underwriting, making portfolio loans attractive for unique investment properties or investors with complex financials.
- Benefits: These loans offer flexible terms and may consider factors like rental income in the underwriting process. Utah credit unions and local banks familiar with the state’s market often tailor portfolio loans to meet local investors’ needs.
- Ideal for: Investors with unique property types, such as multi-family or mixed-use buildings, or those looking for non-traditional financing.
- Example: David invested in a fourplex in Ogden and obtained a portfolio loan from a local Utah credit union. The flexible underwriting allowed him to secure favorable terms despite owning multiple properties, helping him expand his investment portfolio.
3. Commercial Loans for Multi-Family Properties
- Overview: For investors focused on multi-family properties with five or more units, commercial loans offer financing tailored to income-producing assets. These loans assess property income as part of the qualification, often providing flexible terms for cash-flow properties.
- Benefits: Commercial loans typically offer lower interest rates for multi-family buildings, and they’re based on the property’s income rather than the investor’s personal income. Additionally, commercial loans may include options like interest-only payments in the initial years, which improves cash flow.
- Ideal for: Investors focusing on larger multi-family properties who want to scale quickly and rely on property income for qualification.
- Example: Emma, a first-time investor with a 25% down payment, purchased a six-unit apartment building in Provo. Her commercial loan allowed her to focus on the property’s income rather than her personal debt-to-income ratio, making it easier to qualify.
4. Adjustable-Rate Mortgages (ARMs) for Investment Properties
- Overview: Adjustable-rate mortgages offer an initial fixed interest rate (typically for 5, 7, or 10 years) that adjusts based on market rates afterward. ARMs offer lower rates initially, making them a popular choice for investors looking to improve cash flow or sell the property within a few years.
- Benefits: The initial fixed rate is often significantly lower than standard fixed-rate loans, which improves cash flow for the first several years. If you plan to sell, refinance, or improve the property within 5-10 years, an ARM can provide greater upfront savings.
- Ideal for: Investors planning short-term holds, flips, or those who intend to refinance before the adjustable rate period.
- Example: Mike bought a townhome in Lehi with a 7/1 ARM. The low initial rate boosted his cash flow, and he plans to sell the property within 7 years, maximizing profitability before the interest rate adjusts.
5. Home Equity Loan or HELOC for Second Property Financing
- Overview: Home equity loans and lines of credit (HELOCs) allow investors to leverage the equity in their primary residence or other properties to fund down payments or make cash purchases on investment properties.
- Benefits: By tapping into home equity, investors can secure a second property without traditional financing or save on down payments for future investments. HELOCs provide flexible access to funds, which can be particularly helpful for renovations.
- Ideal for: Investors who own property with significant equity and want to expand without a traditional mortgage.
- Example: Sarah used a HELOC on her primary home to fund the down payment on a duplex in West Valley City, allowing her to keep her mortgage options open and maximize leverage.
Key Considerations for Selecting the Right Loan
To choose the best loan for your investment property, consider the following factors:
- Investment Timeline: If you’re planning a short-term hold, an ARM or portfolio loan with flexible terms may offer better cash flow. For long-term rentals, a fixed-rate conventional loan provides stability and predictable payments.
- Cash Flow Requirements: Multi-family properties with a commercial or portfolio loan might yield higher cash flow due to lower initial rates or interest-only options. Ensure that your loan terms align with cash flow needs and don’t overextend expenses.
- Property Type: For larger properties, commercial loans may offer better terms. However, for smaller multi-family properties or single-family rentals, a conventional loan provides the simplicity and favorable rates ideal for residential investors.
Final Thoughts on Financing your First Investment Property
Choosing the right loan for your first Utah investment property can impact your long-term profitability, cash flow, and scalability. By understanding the benefits of each option—whether a conventional loan, portfolio loan, or ARM—you can select financing that aligns with your goals and maximizes your investment’s potential. With Utah’s strong rental demand and property appreciation, an investment with the right financing is an opportunity to build a profitable real estate portfolio. Schedule a strategy call to discuss how to get started.
